NC State Extension Publications

Introduction

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North Carolina’s hemp industry is growing quickly, and there are several contracting options currently offered in the market for industrial hemp. This guide provides a brief overview of common provisions offered in these contracts as well as some provisions to be cautious of. It is important to have a signed, written contract to serve as documentation of your agreement in the event that there is a dispute between the parties.

Hemp can be grown for three end-market agricultural commodities: floral bud, fiber, and seed. The majority of current North Carolina hemp production is for floral bud to produce cannabidiol (CBD) oil (NCDA 2019, unpublished data). For this reason, this guide focuses on contracts for delivery of floral bud material and provides information that may be useful when choosing and negotiating a contract for this product. Additional information will be added as it becomes available.

If you are entering a contract for hemp, you should consider consulting an attorney licensed in North Carolina to review the contract before you sign it. A signed contract is legally binding, and it is important that you understand the terms of the agreement you are entering into.

Common Contract Terminology

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  • Broker: A person, corporation, or any other entity that purchases a hemp product from a producer and sells it to another entity for further processing, wholesale or retail, or for any other purpose.
  • Contract: A contract is a binding legal agreement between two or more parties that a court of law will enforce. Hemp contracts are typically in writing, but some courts may also find verbal agreements to be valid and enforceable.
  • Processor: Any person, corporation, or other business or service that may provide the modification of a raw hemp product into a secondary product different from its original form.
  • Producer: A licensed farmer or any entity that produces a hemp product, typically raw hemp flower, stalk, biomass, or seed, that may be either wet or dried and trimmed and packaged.

Standard Contract Provisions

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  • Independent Contractor: As a producer, if you sign a contract with a broker there may be a provision in the contract that states that you will be considered an independent contractor. These types of contracts also often say the plant material you use will be provided by the broker. This is standard language in contracts we have evaluated. Be aware that you may incur unforeseen costs associated with being an independent contractor that might not be outlined within the contract. Costs may include, but are not limited to, income taxes, drying, and further processing required to execute the terms of the contract.
  • Price: One of the most important provisions in the contract will be the price a producer will receive for the crop. A contract should clearly outline how and when a producer is to be paid and in what form they will be paid: company check, in-kind, part cash and part product, or any other arrangement.
  • Testing: Contracts should address required testing and what specifications delivered material should meet to receive full payment. This may include, but is not limited to, CBD profile, THC content, and presence of heavy metals, pesticide residues, mycotoxins, and molds. It is strongly recommended that producers test their own products using a well-known testing facility. Having their own comprehensive tests provides producers with the appropriate documentation if there is a disagreement with a buyer in the future.
  • Tips for testing: Producers and buyers should agree on a third-party testing facility before signing the contract. A third-party facility refers to a lab that is not owned or operated by the producer or the buyer.

Good to Go

  • Delivery point and price are clear and timely
  • Verification of funds: Buyer places a portion of funds in escrow to cover the purchase
  • Purchase price for flower is based on delivered weight and percent CBD
  • Required testing, sampling protocol, and acceptable limitations are clearly described
  • A third-party testing facility is mutually agreed upon between producer nad buyer
  • Buyer is providing plant material in the form of seeds or transplants
  • Buyer is registered with the Secretary of State

Proceed with Caution

  • Post-delivery location of product is unclear
  • Payment will be made all or in-part with product instead of cash
  • Puchase price for CBD is based on delivered weight only
  • Non-compete clause preventing selling to another buyer for a period of time after the contract has been filled
  • Exclusivity: Restriction for contracting with any other buyer for the current year or multiple years
  • Buyer completely dictates the variety to be grown
  • Purchase price for floral bud is bsaed on acreage only

Steer Clear

  • Company contact information is not disclosed in the contract
  • No specific purchase information is included
  • Payment will be delayed until final product is marketed
  • Assigning grower license to buyer
  • Non-disclosure provision about disputes or contract terms

Cautionary Provisions

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  • Assignment of license: Some contracts have language stipulating that the grower assigns all “right, title and interest” in their grower license to the broker. This results in the broker having all rights in the license. When a grower applies for and receives a license to grow hemp in North Carolina, that license provides rights and responsibilities to the individual who applied for the license. These rights cannot be transferred to other individuals, companies, or entities.
  • Exclusivity: A contract may have an exclusivity clause that states a producer can only contract with one buyer and prohibits the producer from having a contract with anyone else. Producers should have the freedom to enter into as many contracts as their land allows as long as they are not utilizing one buyer’s provided plant material to fill another buyer’s contract.
  • Non-disclosure provision: A non-disclosure provision limits what a producer can say during the life of the contract or even after the initial terms of the contract have ended. Non-disclosures are typically added to keep a producer from discussing disputes that may arise during the term of the contract or to protect other information about the company or terms of the contract.
  • Payment: It is important to understand the terms regarding the price for the crop before signing a contract. Some contracts have a set price based on weight and percentage of CBD content. However, there are many variations in purchasing practices. Cash payments may be based on various quantifiable qualities, such as floral weight, acreage, percentage of CBD, or a combination of these. In addition, payments may be made in product, a combination of product and cash, or delayed until after processing or marketing (Figure 1). Payments may also be decreased or refused for various reasons set forth in the contract. Price reductions are often related to the producer’s raw product not meeting the buyer’s specifications.
Options for cash, in-kind, or delayed payment arrangements

Figure 1. Understand the various options for each type of payment arrangement before entering into a contract.

Documentation

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It is a good idea for all parties to a contract to keep good documentation in the event that there is a dispute at some point. The use of emails and texts as a means of communication will help to provide such documentation. Ensure that everything both parties want is in the contract and clearly written out.

Company information for the buyer should be included in the contract and should include physical and mailing address as well as the full company name. If company information is not provided, it may be a sign that the company is not legitimate or is not reputable. It is a good practice to verify that the company is registered with the Secretary of State.

Final Note

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Although hemp is still a relatively new crop in North Carolina, contracts for hemp are similar to contracts for other products. Parties should conduct business with other reputable parties and conduct their own due diligence before entering into an agreement. Parties should consider consulting an attorney licensed in North Carolina to review agreements before signing.

**Disclaimer: This guide does not take the place of independent legal advice, and it is not intended to be used as legal advice.

References

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H. B. 992. General Assembly of North Carolina. House Bill 992. G.S. 106-568.51. 2016. An act to modify the industrial hemp research program by clarifying the definition of research purposes and the responsibilities of licensees, creating civil and criminal penalties for violations of the industrial hemp program, and ranting rule-making authority to the industrial hemp commission. Accessed at: https://www.ncleg.net/Sessions/2015/Bills/House/HTML/H992v6.html. May 5, 2019.

North Carolina Department of Agriculture. 2019. Industrial Hemp Pilot Program in North Carolina. Accessed at: https://www.ncagr.gov/hemp/. May 5, 2019.

Secretary of State Knowledge Base. 2019. Accessed at: https://www.sosnc.gov/br/search. May 5, 2019.

Five contracts offered to North Carolina growers were reviewed in order to develop this document.

Authors

Agricultural Law Lecturer
Agricultural & Resource Economics
AGI Veteran Liaison
Soldier to Agriculture Program
Extension Specialist, Small Grains
Crop & Soil Sciences

Publication date: Oct. 3, 2019
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